This “Living Legend” Just Called the Bottom in Commodities
This post came to me from the Casey Group. While they are usually quite bullish it is interesting to see a well respected investor calling for the bottom in commodities. If you are on the side that most of us – the side that says we still have at least a little downside to go – then we can expect a number of people to come out and “call the bottom”.
The post in below and you can click here to visit the Casey site for some other great posts.
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Jeremy Grantham thinks the worst is over for commodities.
Grantham is a “living legend” in the investment business. His quarterly letter is one of our few “must reads.” Grantham is the chief investment strategist at GMO, a firm that manages $118 billion.
Grantham wrote about commodities in his latest letter. Regular readers know commodities are the most beaten-down asset class in the world right now. As a group, commodities are the cheapest they’ve been since 2002.
• Grantham says the current commodities bear market is a consequence of the record-breaking bull market that came before it…
Here’s Grantham:
After every historical major rally in commodity prices, there has been the predictable reaction whereby capacity is increased. Given the uncertainties of guessing other firms’ expansion plans, the usual result is a period of excess capacity and weaker prices as everyone expands simultaneously. The 2000 to 2008 price rally was the biggest in history, above even World War II. It was therefore not surprising that the reflex this time was the mother of all expansions and excess capacity.
Grantham then pointed out that China’s slowdown is the other half of a “double-whammy” that’s depressing commodity prices:
This was further exaggerated by a sustained slowdown in demand from China, which is still playing through. The most dramatic example of this was in China’s use of coal, which had grown from 4% of world use in 1970 to 8% in 1988 and to 50% in 2013, the world’s most remarkable expansion in the use of anything since time began. And yet this remarkable surge was followed in 2014 by a reduction in China’s use of coal! And that in a year in which China was still growing at over 6%.
Grantham went on to say that commodities are likely close to a bottom:
And now with a further sell-off in commodities following China’s recent mini stock bust, the reaction phase may be more or less complete: projects have been cancelled and capital spending plans in general have been savaged.
He also noted the extreme pessimism around commodities right now. He even pointed to a “Magazine Moment” as a sign of the bottom:
Investment attitudes are extremely negative, which is, as always, a requirement for change. Today’s Wall Street Journal (July 21, 2015) carries a headline: “Investors Flee Commodities.” Promising. From now on it seems likely that prices will be more mixed, with some rising as others continue to fall.
Yesterday, we showed you commodities are now the cheapest they’ve ever been compared to US stocks.
• The crash of one commodity is hurting Canada most…
Canadian stocks are falling.
The S&P/TSX Composite, Canada’s main stock exchange, is down 3.5% in 2015. It’s declined 7.8% since hitting a yearly high in April. And it recently fell for seven straight days… its worst losing streak since 2011.
Oil prices are 52% lower than they were a year ago. This is a big problem for Canada. Canada is the world’s fifth-largest oil producer. Crude oil is its biggest export. It makes up 27% of Canada’s total exports.
The Financial Post explained, “(I)t has become increasingly clear that the collapse in oil prices is doing much more damage to the Canadian economy than initially predicted.”
Canada could be in an official recession by tomorrow. Its economy shrank by 0.6% during the first quarter, and it releases second quarter numbers tomorrow. The official definition of a recession is when an economy shrinks for two quarters in a row.
• And Canada’s housing market looks wobbly…
Deutsche Bank recently called Canada “the most overpriced housing market in the world.” It said homes in Canada are overvalued by 63%.
Unlike US home prices, Canadian home prices never crashed during the financial crisis. Prices took a small dip, then kept on rising, as we’ll show you in the Chart of the Day. Canadian home prices have risen twice as much as US home prices since 2000.
Last month, the Bank of Canada said, “Canada’s overheated housing market represents a significant risk to the stability of its financial system.”
According to Reuters, the central bank is worried housing prices could fall as a result of “a large macroeconomic shock.”
Two weeks ago, the stock price of a Canadian subprime mortgage lender Home Capital Group (TSX: HCG) crashed 19% in one day when it announced bad results.
Subprime lenders give risky loans to people with bad credit. Defaults on subprime loans were a major cause of the US financial crisis in 2008. This could be a sign of more trouble for Canada.
• As expected, the Federal Reserve decided not to raise rates yesterday…
The Federal Reserve cut interest rates to near zero in 2008 to fight the financial crisis. It has held rates near zero ever since.
The Wall Street Journal reports:
The Federal Reserve on Wednesday left its key interest rate near zero but cited progress in the US job market, a sign it remains on course to raise interest rates in September or later this year.
At the same time, the central bank flagged a nagging concern about low inflation, which is creating caution among officials and could convince them to delay the first interest rate increase in the benchmark federal funds interest rate in nearly a decade.
The Fed has been saying the same thing for years now. It’s not raising rates yet, but it might raise rates soon.
Many analysts think the Fed will finally begin raising rates in September or December.
Here’s Bloomberg Business:
“The committee is keeping the door open for rate hikes later this year, not necessarily opening it further or closing it,” said Michael Gapen, chief US economist for Barclays plc in New York and former Fed Board section chief in charge of monetary and financial markets analysis. “Labor markets have improved further, and they need to see a little more improvement to be ready to go, so that says September or December is in play.”
It’s a guessing game to predict when the Fed will finally raise rates. We don’t know when it will happen. We can’t know. What we do know is how our investments will likely react when the Fed raises rates.
In case you missed it, yesterday we pointed out HSBC’s new study that shows rate hikes don’t hurt the price of gold.
It’s an important finding. Most investors assume that higher rates will hurt gold. The thinking goes that gold doesn’t generate income. So when interest rates rise, people prefer to own bonds and dividend-paying stocks instead of gold.
But the data prove that theory wrong. The price of gold actually went up the last four times the Fed began to hike rates.
Chart of the Day
Today’s chart compares the growth in Canadian home prices versus US home prices.
From 2000 to mid-2006, US home prices increased more quickly than Canadian home prices. US home prices crashed in 2007/8 during the financial crisis. But Canada’s housing market only took a small dip in 2008. Prices quickly recovered and have been setting new highs ever since.
Regards,
Justin Spittler
Delray Beach, Florida
July 30, 2015
Steve Saville said essentially the same thing this weekend. “the “inflation”-adjusted (IA) Continuous Commodity Index (CCI). The chart indicates that in real terms the basket of 17 commodities represented by the CCI just hit a new all-time low. In real terms, commodities are now cheaper than they have ever been.”
That means that in comparison to the last 59 years the risk in buying commodities right now is near zero.
Then – EVENTUALLY Bob it will revert back to the mean and overshoot by ….A LOT….
Of course. Anyone believing commodities will continue their decline is saying they will get even more extreme than they have ever been. The odds of buying copper, oil, gold, silver, platinum, palladium or any other commodity for a profit are better than they have been in 59 years.
agree Bob M.
Very possible, Robert!
buy low…………………………………………………………..the claw
I wish I could see Saville’s piece on the CCI, but it looks like it’s for paid subscribers.
Grantham’s commodities index has had a sharp decline, but is far from all-time lows–33% below the 2008/2011 highs, but still 115% above the 2000 low. Obviously there’s no perfect commodities index.
I think the key statement Grantham makes is: “From now on it seems likely that prices will be more mixed, with some rising as others continue to fall.”
Grantham’s commodities chart, page 10 of the GMO quarterly report:
https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=14
GH:
Steve Saville did an inflation adjusted chart of commodities. If you do that it’s clear that we are in extremes never seen in 59 years. If you adjust any of the commodity indexes for inflation it is clear. Some will continue to fall but by and large the majority will rise.
Excellent point–I don’t see any mention of correcting for inflation by Grantham for his chart.
Commodities in general (CRB) have crashed 80% versus gold since 2000. They would have to at least triple in gold value to return to their 1980-2005 average.
I agree and have been buying physical silver.
I believe, however, the price of silver is substantially manipulated.
I believe this manipulation will only end when there is no physical left to buy.
I do not understand the origin of the amount of physical being removed by sales, since it exceeds the amount I thought was available. Some must have come from hedge funds and from unknown storage.
According to the leading silver GURU at the time in 2001 Ted Butler, silver was the most manipulated market in history, we were going to totally run out of above ground silver by December of 2001 and if we ever got into a war, since silver is the most valuable war metal, it would go to $50-$100 all by itself in a vacuum.
I said we were at a 5000 year low and it was a bottom in late November of 2001 as it hit $4.01 an ounce. It went up 1200% from there in 10 years to just under $50 where I said it was a top.
Who cares if it was the most manipulated metal in history or if we were going to totally run out of it or if it was the most valuable war metal?
How many commodities can you name that did a 1200% climb in 10 years and people were still saying “buy, buy” at the top. Didn’t any of these clowns ever hear the word, “correction?”
According to monetary history ,silver is one of the most manipulated currencies.The majority of the world was on a silver standard before the Brits and Yanks destroyed it for their lovely fiat dominance game.So,not only is silver one of the most manipulated markets,the death and devastation that followed its destruction for global domination is monumental.
I hesitate to accept the beliefs of Mr Polny, but this article might cheer some folks:
http://www.silverdoctors.com/bo-polny-9000-gold-1000-silver-if-1072-holds/
CFS……professor you are being very KIND to Polny
Stop invoking that guys name! He is an idiot where gold is concerned. A stunned monkey could do better throwing creamy pies at a drunken tourist and still make a bulls-eye.
Why did I bother reading that?
Amen to that CFS!
Interesting point from the HSBC study that rate hikes don’t hurt gold. In the general past when rates were headed up, it was believed that inflation was going to take off so rates were raised to slow that probability. Gold used to be seen as a hedge against inflation. Lately some have said that isn’t necessarily so. In the past at least, gold must have thought so. This time rate changes aren’t meant to stop inflation (we supposedly have none) but to reload the Fed’s armory. I’m left wondering if gold will react differently than in past times with rising rates (if they happen)). Just some thoughts.
Rising rates do not hurt gold.
The rates are usually behind the curve.
However we will not get rising rates or rising gold
Bo Polny just made a rather bold call over at Silver Doctors.
http://www.silverdoctors.com/bo-polny-9000-gold-1000-silver-if-1072-holds/#more-56418
100% garbage. I actually wasted a few minutes of my time reading that tripe and have no hesitation calling it unadulterated bull crap. Come on Steven…did you believe that piss was really worth posting here?
With Polny we know he is bullish,unlike some that straddle both sides on any given hour.
living legend — are you for real….? is this site fishing for response….???
casey group stinks…marin katusa…???!!
you are testing what audience you have remaining…
Your comments, Agatha, are uncalled for. Not really sure just what you are trying to do!
I hate to disagree with Mr. Grantham. From the technicals I watch, the commodities cycle move down is not over unless we have an absolutely short term plunge. Dr. copper and others have further to fall and it may be grudgingly slow.
Doc, you are a breathe of fresh air and you may just be one of the very few who has a really good handle on what we are going through (and what is coming). I appreciate you bringing up copper in the context of precious metals. We have a disaster unfolding in the mining sector that is just beginning to hit home and I too feel that this has a lot of time to play out yet.
Doc, good as always…………
What does Grantham know about commodities????????? A living legend….. WHO is managing this site??
I am and it came from Casey Research.
By the way, note Doc’s comment!
Copper,gold and silver are all ready to bounce from my technicals.
Oil could also bounce if the dollar declines here and now.
I have no beef with CR calling a man that is a CIS for a firm with $118 Billion under management.
Al, Im not trying to ‘do’ anything here except tell it like I see it -thats what this is about — or am I mistaken? I have less than 0 respect for casey…and their pundits and their ‘ recommendations.
When you say your selected content is a l’iving legend’….I think you better get his field of expertise correct.
Otherwise it is ridiculous. Let me add a positive here.. it is interesting to have 2 differing viewpoints from 2 competent men i.e. Gary Savage and Doc.
Agatha CORRECT. I have get my info from real analysts that have proven track records over the long term. No pie in the sky contrarion CRAP like Moriarty. That is only one tool..Speaking of Tools the cowboy gambling ways of Bob calling multiple bottoms and eventually you will be right…some day. And yes I Bought Gold in 2000 it was a NO BRAINIER then..
After speaking with a very insightful and accurate Hedge fund manager and doing my own DD, only a few months ago I warned right here that a gold stock melt down could be possible. Bob poked his head up numerous times stating “WE ARE IN A BULL MARKET” and I LOL’d it..
Have a look…How much did you lose?? http://stockcharts.com/h-sc/ui?s=ZJG.TO&p=D&yr=0&mn=9&dy=0&id=p81193800943&listNum=1&a=417740677
While Nobody here the last few years saw any of the meltdown in commodities coming (Bobbo still calls it a correction LOL) Is a correct when many companies go insolvent??
While the fact is you need top drawer fundamental analysis to avoid these catastrophes..Ya know…..like what happening in China Europe USA Latin America and not pot shot crap in the main stream media…
So where are we…Commodities are very oversold….ANY major rally should be shorted….The USD is not going to collapse….
Do some research on Peter Schiffs Fear mongering about the destruction of the USD and how his investments did in Europe and Latin America!? He DESTROYED his investors…In fact The USD chart is very constructive looking right now…
While people like Schiff Casey Bobbo were scaring the crap out of people about the US even 4 years ago a massive rally in the stock market ensued. Car sales took off from a major bottom and the housing market began to recover..THIS IS WHY THE DOW RALLIED PEOPLE (I believe Bob called it Bogus then and I also have an Email from a friend from Bobbo stating that “its darkest before its down” about to years ago. I believe he meant that Gold stocks were about to shine…LOL
When I discuss the printing efforts of the US my buddy said its not near enough to worry about and they would have to double it to be of any concern and he had zero interest in gold…His Fund is up 50% in 2 years at $200 mil…..Now that’s a good fund manager……no pie in the sky analysis…
So if your a high risk gambler o for it!!.
Bill………..all car sale,houses ……..took off on DEBT.
like the USA AND THE WORLD IS IN …………..DEBT…..which can not be PAID…..
What do you think we have beenrunning in for 40years
Hell they have been talking about the debt bomb for 15. All wrong so far. Housing blew up on a huge speculative bubble.
We are sill here and i know quite a few that made a stink pile in that period.
You avoid the issue……..that is in front of you……….
you knew, I knew………did you……..
new game……..relieve yourself from the bondage…..7.5 million behind in their mortgage debt..
YOU might want to read……..WHO WILL BE LEFT TO TELL THE TRUTH…..zerohedge
Ill say it again. Interest rates will stay low. Thats the glue.
If you listen to the experts 6 years ago the bond market was going to blow up..you know how much money was made in Bonds!!??
Markets can stay overbought / sold a long time. Thats where contrarions get killed. Know the fundamentals or your screwed. These experts tell people what they want to hear.
My best friend sold his silver and Bob told him to switch to Gold. How did that work out??!!!! Go look at Fords stock in the last 5 years. Gold bugs only wish.
Bill, silver peaked in April, 2011. If your friend sold and moved into gold, (that’s what I was doing, btw), then he would have enjoyed roughly another 20% move in a matter of months.
Priced in silver, not dollars, gold is up more than 170% since April, 2011.
You don’t compare gold to Ford stock. Would you knock the hell out of people for holding cash instead of stock? Maybe, but I doubt you would have the attitude that you show for those who hold gold.
Believe it or not, gold is up substantially in real terms since 2011. It does not matter that some Marxist fiction like the dollar is up more, gold still did its job better than most are able to recognize. Commodities, including gasoline have plunged far more than gold has since 2011 in dollar terms. The dollar is STILL down 80% versus gold since 2000 and about 98% since FDR’s presidency.
Mathew yes he swapped Silver for Gold but held…When these things get that vertical…..RUN.
When I dumped my silver at $49 like I said last Nov. A guy walks into the Coin store and bought the whole 3000 oz for $150,000.00 now hes sitting on a paper weight.
He asked me why I was selling…I said I bought a long time ago and had a healthy profit. I asked the same. He said there another 10% in it…
Lesson…its the most dangerous investment period and its gone parabolic! Forget messing with this shit and run.
I don’t know what I was thinking even getting into this crap….If i held my commercial real estate with the $250,000 a year rev and growing Id be in way better position today than gambling with this crap…. I’m an idiot too..
Ill tell people the truth no BS from me…Hopefully I will wake them up.
I bought shares after they crashed but then then dead cat bounced numerous times so I dumped them with losses…What shit game…
Bob finally fesses up he knows dick all….He ran around for YEARS that we would collapse and your going to need those coins to buy things…he swore he was right…Even after the Dow major CORRECTION and real estate CORRECTION the real crash was just around the corner.
In his words the Stock market and housing CRASHED and the PMs corrected. Hes full of Sh’it…
I had words with Eric Sprott too. Don’t feel special Bob…
F. Was suppose to be 8yrs
I like sticks thst pay me to wait. Gold stocks are calls on gold and silver is even more dramatic.
A few very wealtly friends wouldnt trade their realestate for gold. Their much smarter then I. As they said gold may heve a place but thy dont even concider it as an investment long term.
Holly crap. Go look at BTO TMM GPR NEM.
Man those chrts are the ugliest things on earth!??
Do you no what basing is??!! Youwant to be a cowboy gambler go ahead. I warned 2.5 months ago. These things need a lot of time before they even stablize. Thats what starts real bull market. You like catching knives I guess.
I remember Casey wrote a piece that headlined “are you brave enough to buy low and srll high” this was 2ish years ago. And what happened?? Wammo.
This is a highly speclative game people and it is not investing in most high levrl managers books. People be carefull. These experts have killed alot of people. Gold is no magic bullet to saving you. Some have promited that it would save you from the destruction of the finacial armagedon for many years. Its crap. If it collapses you will br looking for food snd water.
I remember Casey wrote a piece that headlined “are you brave enough to buy low and srll high” this was 2ish years ago. And what happened?? Wammo.
This is a highly speclative game people and it is not investing in most high levrl managers books. People be carefull. These experts have killed alot of people. Gold is no magic bullet to saving you. Some have promited that it would save you from the finacial armagedon that would come many years ago. Now its just around the corner year after year. Its crap. If it does collapse….you will be looking for food and water.
Bear in mind that nobody has a crystal ball and the business cycle is undefined. But the stock markets are at a high and mining shares are at a low. The correct advice in hindsight would have been ‘bet the farm on the stock market, and when you’re done reaping the rewards, bet the farm on mining shares.’ Did ANTONE give out this advice?
-anyone-
Yes there were a couple that did. I posted their info repeatedly here. The gold scamers would not dare say sell.
The commodities bull ended a long time ago. Yes of course the worst is over. The market has priced it in. Now there is an oversuply in comoditites with many many economies in the crapper. Thats what happens when you get high prices. Hughe over investment in minng ect. If prices were to rise they have the ability to open the taps quickly so to speak. That would push prices back down. Simple stuff. Dont expect a bull market for years.
There will be no bond market blow up as far as I can see. Low interest rates will keep USA chugging and maybe Canadas housing STUPID.
If you read Casey Years ago. Sprott or Moriarty..we should be living under a bridge with the banks shuttered. Bob said we would hang the bankers about 10 years ago. Lol
They kept peole scared of investing in the general stock market cling onto the rebound in gold to be JUST AROUND THE CORNER. Screwed me up for s bit but i quickly wised up did ny own hard core research and moved quickly. Infortunaly friends family did not mive snd got killed.
Commodities did virtually nothing for 20 years in the past big bear.
Canadian house prices will get frost bite soon…………..liar loans will make sure of it and a glut will be on their doorstep……….jmho